FCA consults on rules to improve open-ended property funds

The Financial Conduct Authority (FCA) is consulting on proposals to reduce the potential for harm to investors from the liquidity mismatch in open-ended property funds.


The proposed rules would require investors to give notice, potentially of up to 180 days, before their investment is redeemed.

The FCA stated that it is particularly keen to hear suggestions for alternative measures that might achieve the same outcome.

At present, investors in these funds can buy and sell units on a frequent, often daily, basis, but the underlying property in which these funds invest cannot be bought and sold at the same frequency.

When too many investors simultaneously redeem their investments, a fund manager may need to suspend dealings in the units of the fund because of the liquidity mismatch between the fund units and the underlying property assets.

The illiquid nature of property also means that a reliable price is not always readily available, and in some market conditions the fund units cannot be priced with confidence. This can also lead to a need to suspend dealings in fund units.

Property fund suspensions have occurred with increasing frequency in recent years, including following Brexit and during the coronavirus pandemic.

The FCA has reported seeing repeated suspensions for liquidity reasons, and is concerned that the current structure could disadvantage some investors because it incentivises investors to be the first to exit at times of stress.

The proposed notice period would allow the manager to plan sales of property assets so that it could better meet redemptions that are requested.

It would also enable greater efficiency within these products as fund managers would be able to allocate more of the fund to property and less to cash for unanticipated redemptions.

The FCA will publish a policy statement with final rules in 2021, and the consultation will be open to responses until 3 November 2020.

Christopher Woolard, interim chief executive at the FCA, said: “We think that our proposals will help further our consumer protection objective by reducing the number of fund suspensions, preventing unsuitable purchases of funds, and by increasing product efficiency for fund managers.

“We want open-ended funds to provide a structure through which investors can safely invest in less liquid assets which offer attractive expected returns and at the same time supports investment that benefits the wider economy.

“We hope the proposed new rules will directly address the liquidity mismatch of these funds making them more resilient during periods of stress, and allowing them to operate in a way that all investors are treated equally.’


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